GBP/JPY extends winning spell to 196.00 after BoJ keeps interest rates unchanged

• GBP/JPY advances to 196.00 amid uncertainty over BoJ’s interest rate outlook.
• The BoJ sees inflation rising in the coming years but has projected weak economic growth.
• UK’s firm Services PMI has deepened fears of persistent inflationary pressures.

The GBP/JPY pair extends its winning streak for the fourth trading session on Friday and rises to a historic high of 196.00. The cross strengthens after the interest rate decision from the Bank of Japan (BoJ) came in-line with market expectations.

The BoJ kept interest rates steady in the range of 0%- 0.01%. The monetary policy statement indicated that the central bank remains on track for policy normalization. The BoJ said, “It will adjust the degree of monetary easing if the underlying inflation rate rises,” instead of currently buying about 6 trillion JPY worth of Japanese Government Bonds per month.

For the economic and inflation outlook, the BoJ has forecasted weak growth and sees inflation rising in coming years. This has raised doubts among investors, as higher inflation could not be achieved by weak growth. It has also deepened uncertainty over the scope of policy tightening.

Meanwhile, softer than expected, Tokyo’s annual Consumer Price Index (CPI) data for April has deepened doubts over Japan’s inflation, which remains above the 2% target. The annual CPI rose at a slower pace of 1.8% from expectations and the prior reading of 2.6%. Tokyo CPI excluding Fresh Food softened to 1.6% from the consensus of 2.2% and the former reading of 2.4%.

On the United Kingdom front, the Pound Sterling performs strongly as strong Services PMI figures have deepened fears of persistent inflation. Higher Services PMI boosts employment and wage growth, which could stall progress in price pressures easing to the desired rate of 2%. This will prompt fears of UK interest rates remaining higher.